Conversion of LLP into Private Limited Company
Conversion of LLP into Private Limited Company
Registration of LLP is on the rise in India due to various factors. LLP registrations in India has risen by 55% during the Financial Year 2014-15 and is to set to rise even further with rising awareness about LLP. Most of the Entrepreneurs opting for LLP registration are small businesses that do not foresee any requirement for raising equity funds. However, some of these small businesses may at some point have a requirement to convert to a private limited company due to various reason. Therefore, in this article, we look at the process for conversion of LLP into a private limited company.
Choice of LLP vs Private Limited Company
LLP is mainly ideal for small businesses that have and will continue to have for a reasonable amount of time, an annual sales turnover of fewer than Rs.40 lakhs and a capital contribution of fewer than Rs.25 lakhs. LLPs that satisfy the above condition do not require an audit each year, whereas a private limited company irrespective of turnover and capital requires an audit of financial statements – additional cost and compliance. However, if an LLP crosses an annual turnover of Rs.40 lakhs or a capital contribution of more than Rs.25 lakhs, the compliance requirements for LLP and Private Limited Company become almost similar, making the private limited company a better choice.
Reasons for LLP Registration
The following are reasons some small businesses opt for an LLP registration:
- The awareness about Limited Liability Partnership (LLP) introduced in 2010 has steadily increased among Entrepreneurs over the year and many small businesses are opting to start an LLP now instead of a Private Limited Company.
- An audit is not required for an LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25 lakhs. Whereas, for a Private Limited Company, an audit is mandatory irrespective of sales turnover or capital.
- LLP there is no concept of dividend distribution tax. Whereas, for a Private Limited Company, dividends are taxed at 15%.
- In LLP, there is no concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
- The process for incorporation of LLP also involves fewer documents and is less cumbersome.
The above reasons have led to strong growth in the number of LLPs registered in India.
Reason for Private Limited Company Registration
The above reasons may be good enough for many small businesses to opt for starting an LLP instead of a Private Limited Company. However, LLP still lacks a few significant advantages over a Private Limited Company as follows:
- LLPs do not have the concept of shareholders. Hence, all the owners of an LLP would be a Partner in the LLP. This structure is not suitable for Venture Capitalists and Private Equity Investors – who do not wish to actively participate in the management of the Company. Hence, equity investors will only invest in a Private Limited Company. Therefore, if the startup or promoters have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.
Procedure for Conversion of LLP into Company
Follow the below procedure for the conversion of an LLP into Private Limited Company:
Obtain Name Approval
Step 1: Obtain name approval from the Registrar of Companies (ROC) by submitting Reserve Unquie Name (RUN) form, which is in e-format.
Securing DSC and DIN
Step 2: After obtaining name approval, apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the member of the LLP who will be the directors of the Private Limited Company after conversion.
Note: In case of non-applicability of DIN, the applicant needs to provide address proof, identity proof and photographs along with the application. Therefore, obtain DIN directly through filing incorporation form.
Filing of Form URC-1
Step 3: Further, Form URC-1 needs to be filed by the applicant; furnish the following list of documents along with the form URC-1.
- Provide details such as name, address and shares held by the members along with the member’s list.
- Provide details such as Name, Address, DIN, passport number along with an expiry date of all the directors of the Private Limited Company.
- An affidavit is required from the first directors of the Private Limited Company stating that they are not banned from being a director.
- Also, file all mandatory documents with the Registrar of Companies for the registration of the company.
- Note: The details provided by the company should be complete, correct and accurate to the best of their knowledge.
- Copy of Limited Liability Partnership agreement with a list containing the name and address of the partners of LLP and a certified copy of registration which is duly verified by at least two designated partners of LPP is required.
- The statement with the details of the nominal share capital of the firm and the number of shares separated, the number of shares taken and the amount remitted for each share and the name of the firm with the word private limited to be provided.
- The no-objection certificate from all the creditors has to be provided.
- Duly certified accounts statement of the company by the auditor, which should not be less than six days from the date of application and the copy of the newspaper advertisement is required.
Memorandum of Association & Articles of Association
Step 4: Draft the Memorandum of Association (MOA) and Articles of Association (AOA) and submit to the Registrar of Companies. After the approval of the company name, the Register of Companies sanctions the form URC-1.